Last week, we followed the lead of Marcato Capital Management and added Itron Inc. (NASDAQ: ITRI) to our portfolio. Today we will provide an overview and analysis of the company to see why it makes sense as an investment.

Itron is an advanced metering infrastructure (AMI) specialist. It sells hardware and software products to primarily utilities to help them collect, analyze, and utilize data.

Its products are installed in about 100 countries worldwide, in roughly 8,000 utilities. The U.S. and Canada account for about 55% of revenues. Utilities use Itron’s products because they help them better manage assets, lower costs, and improve customer service.

Itron offers both standard meters and smart metering products, systems, and services. Growth comes primarily from the transition to smart technologies.

Standard metering systems are basically the old meters installed on the location where utility services are provided. They collect usage data, but that’s it. On a regular basis (usually monthly), a utility representative has to visit the customers’ premises to take manual readings.

On the other hand, smart metering systems enables utilities to remotely collect data and conduct two-way communications (between the meter and the central system). Utilities can remotely collect and analyze meter data to optimize operations. They can connect and disconnect service to the meter, send data, and interact with other connected devices, such as smart thermostats and appliances. This is part of the ongoing Internet of Things (IoT) evolution.

Smart meters can let utilities know its customers’ usage patterns so they can adjust supply accordingly. The meters also alert utilities when there are outage or service delivery problems.

Smart meters plays an integral part in the smart grid, an electricity supply network that uses digital communications technology to detect and react to local changes in usage. The world is transitioning to smart meter systems and smart grids, and Itron is in the middle of this transition.

Besides the smart meter units, Itron also offers meter data management software and knowledge application solutions to its customers. In other words, it sells software and systems that help utilities better optimize its deliveries.

According to IHS Research, a business research firm, in North America the penetration of smart meters is about 60% so there’s still some room to grow. Globally, the penetration is only 20%. In particular gas and water meters are behind electricity meters in regards to automation.

The business may not sound the most exciting, but it’s steadily profitable. Itron’s financial metrics have improved lately due to a concerted effort to improve efficiency. The company hasn’t yet reported full-year 2017 results yet, but through the first 9 months of the year, compared to the same period in 2016, operating cash flow was up 40% and EBITDA margin improved from 10.4% to 11.7%.

In January 2018, it completed its acquisition of Silver Spring Network for $830 million, a deal Itron believes carries major long-term strategic benefits. Unlike Itron, Silver Spring does not sell smart meters, but like Itron, it provides smart metering communication networks. Therefore the two companies complement each other and the acquisition allows Itron to broaden its portfolio of offerings.

Furthermore, Silver Spring has made greater inroads into the IoT arena. It specializes in connecting street lights into a network for municipalities in order to improve control and reduce cost. In 2015, it launched an IoT network called Starfish that enables its customers (enterprises, cities and utilities) to connect a broad range of devices.

You may have heard of the term “smart city.” It refers to part of what the post-merger Itron will do: enabling a city to use various sensors to collect electronic data that enables it to better manage its resources and assets, such as streetlights and traffic lights, more efficiently.

All of Silver Spring’s advances in IoT now belongs to Itron.

The deal also makes Itron the largest AMI player in North and South America by far at more than 50% market share. It also makes Itron number one in the world by a narrow market.

Additionally, the deal creates substantial synergies. Itron projects annual savings of $50 million per year within three years of the deal closing. It also expects the deal to be accretive—add to earnings—by next year at the latest. The acquisition also adds more than $1 billion of backlog—orders yet to be fulfilled—to Itron’s own backlog.

While the deal added about $750 million to Itron’s debt, and pushed its total net debt (debt minus cash) to $1 billion, Itron thinks the additional business Silver Spring brings in can lower leverage to 2-times EBITDA from 3.2-times EBITDA within 2 years. Basically, Itron acquired a company that improves its growth profile without damaging its financial health.

Despite a valuation of about 21-times projected forward-year earnings, ITRI isn’t expensive when considering its earnings growth rate. After integration of Silver Spring, Itron’s earnings-per-share growth is expected to be at least in the mid-teens per year, possibly even eclipsing 20% a year.

Our initial suggested buy-up-to price for ITRI is $72.